AOL: Damaged but Not Dead

In the late 1990s, online giant AOL (AOL) was all the rage, a dominating force in Internet access and email. But then came the disastrous merger with Time Warner in 2000. After that, almost everything went downhill, with the company spinning off from Time Warner in 2009. But AOL today does have an energetic and highly accomplished CEO, Tim Armstrong, who took office shortly before the spinoff.

Armstrong has been involved in Internet advertising since its invention, helping to build Google’s advertising unit from scratch and leading that division. With AOL losing dial-up customers at the rate of 25,000 per year, Armstrong is trying to build an advertising model based on strong content. AOL has used acquisitions to boost the quality of that content.

In March, it bought web aggregator and blogging outfit The Huffington Post for $315 million, and Armstrong put that firm’s successful founder, pundit Arianna Huffington, in charge of all AOL content. AOL also has acquired TechCrunch, a technology news blog, and the video site 5min Media. In addition, Armstrong expanded the local news site Patch, which he co-founded before AOL bought it.

Nascent rebound

AOL is finally starting to see glimmers of a turnaround. Display advertising sales increased 4 percent in the first quarter from a year earlier, to $130.5 million. That gain, the first in four years, was powered by the economic recovery.

"It is a milestone quarter for us at AOL," Armstrong said in a conference call. "I think those changes are really paying off . . . The patient is up and running around."

But the question is how fast. Of 16 analysts tracked by Thomson/First Call, 15 rate AOL shares a hold and just one a buy.

Analysts at Benchmark recently cut their share price target to $23, thanks to AOL’s sagging sales, but they maintained their overweight rating on the stock.

In the late 1990s, online giant AOL (AOL) was all the rage, a dominating force in Internet access and email. But then came the disastrous merger with Time Warner in 2000. After that, almost everything went downhill, with the company spinning off from Time Warner in 2009....